Monday, June 11, 2007

DISINVESTMENT OF PSUs: BENEFICIAL OR HARMFUL FOR INDIAN ECONOMY

Whenever the term disinvestment comes up some questions strike our mind? Why should the government sell public sector shares at all? And what should the money from disinvestment be used for?
The normative theories justifying disinvestment as a direction for public policy draw their inspiration from several different visions of a good society. With the rise of conservative governments in Great Britain, the United States, and France, disinvestment has come primarily to mean two things:
(I) Any shift of activities or functions from the state to the private sector; and, more specifically,
(II) Any shift of the production of goods and services from public to private.

The second, more specific definition of disinvestment excludes deregulation and spending cuts except when they result in a shift from public to private in the production of goods and services.
In India the disinvestment commission was set up on August 1996 for suggesting modalities for undertaking of equities for select PSU’s. The purpose of disinvestment is quite simple- to get government out of business, so that government may concentrate on sovereign functions: a set of functions that can be privatized.

There are good and bad reasons for selling public sector shares. For many decades, socialist governments created a huge public sector mainly through borrowed money and nationalization.

In theory, the public sector belongs to the people of India. In practice it belongs to netas and babus, and has always been a web of patronage and kickbacks. Clearly, the original rationale for a huge public sector was farcically misguided. Today, we need an altogether different role for the state. Instead of trying to monopolize production, or attempt what the private sector can do equally well, the state should focus on tasks that it alone can do: providing basic education and health, rural development, fair regulation, a decent police, a decent judiciary and a decent administration.

Alas, for four socialist decades, ideologues focused on increasing public sector monopolies while letting critical state functions like justice, policing and administration wither away. The state ceased to perform its most critical functions and concentrated instead on expanding its web of patronage and kickbacks.
The best reason for disinvestment is to put an end to this, and change the role of the state. Selling government equity will produce two lesser gains also. First, it will generally improve the management of public sector enterprises (though there could be exceptions). Second, the sale will provide funds which can be used to improve social services or reduce the public debt or both.
A bad reason for disinvestment is to raise some money in desperation to stave off bankruptcy in a mismanaged economy. Yet this is the key reason why budget after budget proposes disinvestment. Further if we have to be against disinvestment, we can say that the government system being, what it is, the cost of doing government business is high. The present government sector displays on an average a fairly high cost of doing business than the average of private sector. Last but not the least, there is the question of moral hazard. Does government ownership gives it a disproportionate right in influencing policy decisions or indeed transaction decisions.
And if that happened, and I believe it does, it needs to be curbed.
Ministers are very reluctant to let go of their sources of money and patronage. Bankruptcy is finally forcing changes, but in inconsistent ways that often means depressed sale prices. Yashwant Sinha proposed to reduce the government's equity in public sector banks to 33 per cent, yet retain government control. But no investor will buy bank shares in such circumstances save at throw-away prices. The nation has invested Rs 270,000 crores of its hard earned money in 240 central PSUs and half of them lose money. It is even worse at the state level where 90 percent of the 946 enterprises are sick.
Imagine, how India might have been transformed had we invested this money in schools and primary health centers, training our teachers and Para medics on drinking water.... Alas, it is the same nasty story of a thrifty, vibrant, hard-working private India carrying a parasitical, corrupt public India on its back.
But Above all, Disinvestment was going to be one of Indias few recent successes, and just when the nation was beginning to reap the rewards of enormous hard work, politicians stopped it because they had second thoughts. It was like stopping a general in the middle of battle and question if war is good or bad. They charged that disinvestment is a loot of public wealth, when they secretly knew that it is they who had looted the public sector for fifty years.
They raised perverse arguments that government should not sell profit-making entities, when they realized that these would soon become loss-making entities in tomorrows competitive economy, and be worth only a fraction of todays value. They opposed strategic sales when they could see that this route had delivered two to ten times more value than public sales.
So we can summarily come up to a conclusion that the government should get out, or the government should be there. The government should watch the situation and it should become the enabler for the private sector and slowly get out of the business as is being done now.

Finally, after analyzing the above mentioned pros and cons I believe that the Indian disinvestment commission has rightly recommended disinvestment at various levels for number of PSUs such as MFIL,GAIL,MTNL,CONCOR,PHL,ET&T,HVOC,HCIL, R-ashok & U-ashok and NALCO.
For several enterprises namely ONGC, RITES, PGCL the commission has advocated no disinvestment for present.
Above all what I believe is that disinvestment of Indian Public sector will be remembered by the history as one of the greatest achievement of Vajpayee government, alongside the repair of our relation with US.

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